The Relation of Invested Capital to Profit
BY DANIEL M. SHEEHAN PARTNER, HOUSTON OFFICE
Presented before the Houston Control, Con-trollers Institute of America — March 1956
It is a great pleasure to me to appear tonight before the Houston Control of the Controllers Institute of America, which is now my home control since becoming a resident of this great city. The Institute has become a noted group and I feel proud, as anyone should, of having this opportunity to talk before you. I hope I can measure up to your expec-tations in presenting this talk on the subject THE RELATION OF IN-VESTED CAPITAL TO PROFIT.
The primary purpose of business is to earn a profit. A very important
measure of the adequacy of this profit is its relation to the capital
invested. In my opinion, companies which have had the greatest success
have given consideration not only to an adequate composite return on invested capital, but also to a satisfactory return on investment requir-ed for each operating division and for the manufacture of each product.
There probably are many companies enjoying a good ratio of net income to capital invested which are unaware that this may result from exceptionally good returns on certain products which offset low profit on some products and losses on others. A thorough knowledge of the actual ratio of net income to capital invested with respect to each product would unquestionably be of great help to these companies in assisting the managements in placing these low profit and unprofitable items on a more satisfactory profit basis, thereby improving the overall
I should like to treat the subject tonight in four phases:
1. From the standpoint of a company over-all.
2. From the standpoint of an operating division of a company, organized on a divisional basis.
3. From the standpoint of the return on investment in each product
of a company, and
4. The estimated rate of return on proposed projects covering new or expanded facilities.